Commenting on “significant market speculation” that Pfizer (PFE) is preparing to execute a large M&A deal, BMO Capital analyst Alex Arfaei argued that he sees a strong strategic rationale for a merger with Biogen (BIIB). The analyst sees a deal for Bristol-Myers Squibb (BMY) as unlikely given the uncertainty associated with the latter’s pipeline.

PFIZER/BIOGEN MERGER: In a research note to investors this morning, BMO Capital’s Arfaei noted the that there is “significant market speculation” that Pfizer is preparing to execute a large M&A deal. While many sources, including Bloomberg, have speculated that the company could target Bristol-Myers given Pfizer’s focus on oncology and Bristol’s setbacks, the analyst believes a deal for Biogen would make more sense. Pointing out that Pfizer has a “significant gap” in neurology, Arfaei says the company cannot afford to be behind in both Immuno-Oncology, or I-O, and Alzheimer’s disease. In the latter area, Biogen, Merck (MRK), AstraZeneca (AZN), and Eli Lilly (LLY) all have pivotal trials reading out in 2019-2020. Biogen’s aducanumab has shown “very promising data,” the pipelines are complementary, and Pfizer could probably manage Biogen’s mature neurology franchise more efficiently, he contended. Further, the analyst argued that Pfizer could have an opportunity to leverage near-term volatility in Biogen’s multiple sclerosis franchise to strike a deal during the next 6-9 months before a potential interim look on aducanumab, which Arfaei views as the strongest of the next wave of Alzheimer’s drugs in development. He reiterated an Outperform rating and $39 price target on Pfizer’s shares.

WHAT’S NOTABLE: Pfizer has announced that Albert Bourla was named COO effective January 1, 2018. Bourla has been the Group President of Pfizer’s Innovative Health Business since the beginning of 2016. Under his leadership revenues for the Pfizer Innovative Health business grew 11% operationally in 2016 and in the first nine months of 2017 have grown 9% operationally.